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Tiered Pricing: Good for Telecom and Cable Stocks?

Since the introduction of modern mobile telephone technology, consumers have complained about, and fought against, what they consider to be excessive charges and fees billed by service providers (e.g., AT&T (T) - Free Analyst Report, Verizon Comm. (VZ - Free Analyst Report), Sprint Nextel (S)). In recent years, the Federal Communications Commission (FCC) has increased its focus on related customer billing and, lately, paid much attention to consumer protection issues involving broadband speed. Cable (Cablevision (CVC), Comcast (CMCSK), Time Warner Cable (TWC)) and telecom companies want to widely introduce a tiered pricing system, which they believe would unclog networks and establish a fairer fee structure. FCC Chairman Julius Genachowski has been cautious about letting the companies have their way.

Vocal wireless phone customers, complaining about the surprise of extra monthly charges for exceeding capacity limits on roaming, texting, data and Internet usage and service termination fees, have attracted the attention of the FCC. The Commission appears ready to implement new rules that would require telcos to alert customers when they are close to hitting service plan limits. Too, commissioners are reviewing whether early termination fees are excessive, and if companies are properly informing customers of the potential fees.

Likewise, the FCC is carefully weighing the potential positives and negatives of new usage-based pricing plans for fixed cable and mobile wireless broadband service. The expanding use of capacity-hungry mobile devices, e.g., Apple Inc.’s (AAPL) iPhone and iPad, and the proliferation of data-heavy Web downloads (games and movies) are beginning to stress the national broadband network. Time Warner Cable tried to introduce a tiered pricing plan, with capacity limits at certain price points and accompanying overage charges, but, after a brief period, negative publicity forced its suspension. Recently, AT&T has tested the waters, unveiling a tiered offering for its wireless broadband service. If the telco is successful, it would be a plus for the cable companies, as well as the telcos.

Cable companies and the telecoms say that only a small percentage of their subscribers are heavy users of capacity. They want the heavy users to pay more for service. The companies have stated that the majority of customers are very modest users of capacity and, via the tiered plans, will see reductions in monthly charges. They believe that the heavy users will more closely monitor their consumption and reduce it, when possible, thereby helping to ease system congestion. Here too, the FCC wants to protect consumers from any exorbitant charges.

At the same time, the Commission is reviewing net neutrality issues, which could lead to some pricing curbs and open access rules, i.e., forcing the cablers to allow competitors to use their networks for a fee. On balance, we don’t believe that the FCC (or U.S. Congress) will adopt an exceptionally harsh stance against the cable providers.

Industry and FCC surveys indicate that most people do not know the speed of their Internet connection. The Commission is of the opinion that consumers should know these speeds and if data download and upload rates are sufficient for their individual needs. Mr. Genachowski believes that the better customers are informed, the better the market will perform, resulting in improved broadband service. An FCC speed test is available at www.broadband.gov.

Unless companies notably step up the provision of information, for the majority of people, choosing one of the tiered pricing plans will probably be a trial-and-error process. Those experiencing meaningful overage charges will likely adopt plans that offer higher broadband capacity limits. There is a risk some will stay in premium plans that provide more capacity than they need. Usage trends appear to favor growth of plan upgrades, which augurs well for cable and telco operating results.

Cable providers and the telecoms are working to beef-up the efficiency of their networks, making use of advanced software, electronic equipment, fiber-optic backhaul lines and, among other technologies, wireless fidelity systems. Their overriding aim in this effort is to contain operating expense and capital outlays.

With the FCC and U.S. legislators keeping a close watch on the situation, we believe that tiered pricing will be implemented nationally, and in a way that protects consumers and allows service providers a fair return on investment. Consumers should continue to loudly express their opinions on price levels. The majority of broadband subscribers likely will gravitate toward the plans that best meet their needs. Competition appears sufficient to avoid price gouging. It should turn out to be a win-win situation for all involved.